CEPAC Bonds: Additional Revenue Source

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4.1 CEPAC Bonds: Additional Revenue Source

72 CEPAC Certiicados de Potencial Adicional de Construção, or Certiicates for Additional Construction Potential is an innovative urban inancing instrument with features that combine value capture, development exaction, and air right sale approaches. CEPACs are bonds that are issued by municipal governments for a speciic area within their cities designated for redevelopment. The bonds are targeted at developers bond buyers and provide additional development rights that entitle them to build above the density limit speciied by the current zoning regulations sometimes referred to as “ up-zoning” for the designated area. For cities, the proceeds from the bond sales provide upfront funding to build speciic improvements, generally in the transportation and afordable housing sectors, in the designated area without creating additional public debt. For developers, CEPAC bonds provide additional building licenses with guaranteed improvements and lexibility to launch their individual development projects according to their own perception of the market. Master planning for the designated area is used to determine the improvements needed and establish the upper limit of the additional development density, e.g., in terms of loor area ratio FAR, for both residential and non-residential uses. Each designated area is also subdivided into smaller zones with their own FAR ceilings. Ofered in the stock market, CEPACs are sold electronically through public auctions. For a designated area, the number of CEPACs ofered has a maximum limit commensurate with the upper limit on the additional development density. On a given auction, CEPACs have the same minimum face value initially, but the inal price is largely determined by the supply and demand of the market at the time of the auction. CEPAC bonds are also tradable openly in secondary markets as dictated by market demand. CEPACs can be sold in private auctions, which are targeted at contractors and vendors in transportation, afordable housing, and other infrastructure service sectors. Efectively, the bonds sold privately are used by cities as non- budgetary funding to pay for contractors and vendors that provide goods and services associated with the improvements in designated areas, be they to build or renew infrastructure or build afordable housing to remove or urbanize slums. Because of the smaller subdivisions with their own FAR ceilings, each purchased CEPAC must be designated to a speciic plot of land where the additional building right will be used. Once the FAR ceiling is reached within the subdivision, a developer 72 For additional discussions on CEPAC bonds, see Sandroni 2010, Serva 2014, and WEF 2014. 79 cannot use their CEPACs in that zone even if they are entitled to additional development rights in the larger area. The unit area of development associated with each CEPAC bond may also vary depending on the value of the land in each subdivision. For example, where the land is cheaper, a CEPAC may correspond to 3 square meters whereas, in more expensive areas, it may be 1.5 square meters. The concept behind CEPAC was developed as early as in 1995 in Sao Paulo, Brazil, but its use as a formal municipal infrastructure funding tool was delayed until appropriate federal law was passed in 2004. The tool has since been used successfully by the municipal governments of Sao Paulo, Rio de Janeiro, and Curitiba. Over the last decade, these three cities have been able to raise almost 4 billion in bond proceeds to pay for their urban redevelopment projects. In Sao Paulo, CEPACs are tied to urban redevelopment areas known as “urban operations” or “UO.” A UO is a tool used by the city government to efect a structural transformation of a large urban area within the city through a partnership between public authorities and private developers. It also involves the participation of landowners, investors, residents, and other stakeholders and has to be approved by the city council. A critical element of UO is incentive payments, established in the city statute, that are directly tied to changes in zoning indices, such as FAR, land use, and footprints. These incentive payments are used to pay for the needed infrastructure and other public “interventions” that trigger the transformation in the UO. In 2004, the city government in Sao Paulo approved the use of CEPAC bonds as the incentive payment mechanism for two of the ive approved UOs, Faria Lima and Agua Espraiada. Through multiple public and private CEPAC auctions, these two UOs were able to raise over R1.6 billion US 800 million in the irst ive years see Exhibit 14. 73 The CEPAC revenues from the two UOs were almost 60 percent of the annual property tax revenues for the city as a whole. The new residential and commercial developments built with the rights provided by CEPACs also contributed to additional increment in property revenue taxes for the city. Preliminary estimates indicated that, in some cases, the property tax revenue increment could be as much as 4.4 times per square meter when compared to the base case. Building institutional capacity to administer CEPAC bonds more eiciently was critical to their success. For the two Sao Paulo UOs, CEPACs were issued by a city agency called EMURB Empresa Municipal de Urbanização. EMURB was in charge of the overall management inside the UOs, including setting the priorities for investments in infrastructure and afordable 73 See Sandroni 2010 for more detailed discussion on Sao Paolo CEPAC auctions. 80 Exhibit 14: CEPAC Auction Results for Faria Lima and Agua Espraida UOs Year Faria Lima UO Agua Espraiada UO Ofered No. CEPACs